The U.S. Tax Court today issued an opinion concluding that “residual value insurance”—a contract that insures against the risk that the residual value of an asset, when returned at the end of a lease, will be significantly lower than the expected value—as sold by the taxpayer constituted contracts of “insurance” for federal income tax purposes.
The Tax Court found that the risks insured by the taxpayer’s policies covered an insurance risk. The case is: R.V.I. Guaranty Co. Ltd. v. Commissioner, 145 T.C. No. 9 (September 21, 2015). Read the Tax Court’s opinion [PDF 210 KB]
The taxpayer sold contracts for “residual value insurance.” Parties insured under these contracts included leasing companies, manufacturers, and financial institutions. The assets insured included passenger vehicles, commercial real estate, and commercial equipment.
The insured parties were the lessors of these assets or provided financing for such leases. When pricing a lease, a lessor had to estimate what residual value the asset will have when it was returned at the end of the lease.
The taxpayer insured against the risk that the actual value of the asset upon termination of the lease would be significantly lower than the expected value.
The IRS determined that these policies did not constitute insurance for federal income tax purposes, based on a determination that the lessors were purchasing protection against an investment risk, not an insurance risk. Therefore, the IRS concluded that the taxpayer was not an “insurance company” (entitled to compute its taxable income using the insurance accounting rules under section 832) and assessed an income tax deficiency of approximately $55 million for the 2006 tax year.
The Tax Court today held that the policies were insurance for federal income tax purposes.
© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.